Building for the future

By: Published on: October, 2015

Public-private partnerships are all the rage in Russia, with toll roads, motorways, airports and medical facilities springing up around the country. New PPP legislation passed this year, which protects the right of all investors, is expected to boost interest even further, dragging in global capital in the years and decades to come as Russia looks to fill a $1 trillion infrastructure gap.

Infrastructure has at times been an overlooked aspect of
Russia’s vast and open economy. No longer. Moscow
is channelling more investment capital into much-needed new
central and regional highways, toll roads, hospitals, airports
and special economic zones.

Laws have been written and amended to guarantee the rights
of funds and institutional investors, both local and foreign,
keen to invest in a slew of new public-private partnerships
(PPPs).

In short, this is the beginning of a major push into
infrastructure lending and spending, which will drive
Russia’s economy ahead for decades to come.

It’s hard to underestimate the potential in
Russia’s infrastructure and project finance space.
The opportunities in PPPs alone are, says Oleg Pankratov, head
of infrastructure capital and project finance at VTB Capital,
"simply enormous. Russia needs to invest $1 trillion in
infrastructure in the years to come, and obviously state
budgets alone cannot finance that amount."

Pragmatic and systematic

Moscow has taken a series of pragmatic and systematic steps
to boost infrastructure investment. In July 2015, parliament
passed a federal law that allows private investors to initiate
a new PPP project, and then to drive it forward.

The law, which comes into effect on January 1, 2016,
regulates the basis of legal relationships, grants security
rights over infrastructure and PPP projects to bond holders,
defines the status of financial parties, and governs the
mechanisms that oversee a project from inception to
conclusion.

It is also a pan-national piece of legislation: what works
in Moscow or St Petersburg, is also legally binding in cities
from Novosibirsk to Omsk, and Samara to Rostov-on-Don. Around
130 PPPs are expected to get the green light in the near
future, channelling $30 billion into major new projects.

VTB Capital’s Pankratov says the new rules are
"similar to international regulatory norms, guaranteeing a
long-term investment in a Russian PPP project".

The most visible projects are being undertaken in the great
cities in the west of the country. Take the Moscow-St
Petersburg M11 toll road, a major stretch of top-quality
motorway split into several sections. Some are state-funded and
others are PPP invested, while a few are based on long-term
investment contracts, a little like a concession model, but
with a smaller portion of the invested funds being privately
managed.

For the PPP aspect of the motorway, VTB Capital helped to
raise R14 billion ($215 million) via bonds to fund two key
sections, with much of the capital sourced from local pension
funds keen to be involved in longer-dated and inflation-linked
assets.

[International financial institutions are]
welcome to participate in any project, so long as
they have access to rouble
financing

Oleg Pankratov, VTB Capital

"The bonds were issued in an inflation-linked contract
offering a rate of Russian inflation plus a spread of 2.5-3%
depending on the tranche," notes Pankratov. "This shows that
deals can be done – this is the first deal involving a
combination of bank loans and bonds distributed in the market.
It demonstrates that the market is active, and that deals are
happening."

Moreover, it underlines the rude health of
Russia’s PPP model: successful funding of a key
stretch of the country’s biggest toll road proves
that the PPP model still works onshore. It also shows that the
domestic bond and pension fund sectors are now at a stage of
development where they can match the sort of capital demands
needed to complete very large infrastructure projects.

Over the years ahead, much of the capital needed for new
projects will be sourced from domestic non-state pension funds,
which invested $2.7 billion – or 11% of their total
assets – in non-financial corporates in the second
quarter of 2015 alone, according to Russia’s
finance ministry.

Of that total, R15.5 billion ($240 million) was used to help
finance the PPP sections of the M11, with capital also
channelled into major housing projects, and oil and gas
pipelines.

Russia is taking a national view of its vast infrastructure
needs. This will let the regions set their own agenda, allowing
local officials to decide which projects most need new
investment, and then encouraging them to tap local and
international institutions for capital.

For instance, plans are being set in place to tax
heavy-goods vehicles based on the distance they travel, with
revenues then recycled back into regional PPP projects.

"The regions are very interested in this," says Pankratov.
"There are already bridges being built over the Buy and Kama
rivers, which are progressing very well. These are the first
major PPP projects outside the 'central’ Russian
regions: they were closed last year and construction is
progressing very well."

Transportation space

There is also plenty of life beyond the transportation
space. Airports are set to be a major source of new
infrastructure and project financing and investment. VTB
Capital is the owner of Pulkovo Airport in St Petersburg, which
recently opened a bustling new second terminal.

Authorities in the city also recently launched a tender to
construct and operate a new public hospital. And investors are
expected to begin bidding on stages three and four of the
Moscow ring road in the last three months of 2015, a project
that should see a new influx of rouble-denominated funding by
domestic banks and bond investors.

Many if not most local infrastructure projects are expected
to remain denominated in Russia’s currency for the
foreseeable future, notes Pankratov: after all, when you have a
project like a toll road that earns money in roubles, it makes
sense to fund it in roubles.

And, of course, he notes, international financial
institutions are "welcome to participate in any project, so
long as they have access to rouble financing. The European Bank
for Reconstruction and Development is a key lender to St
Petersburg’s landmark Western High-Speed Diameter
toll road."

Investors are expected to continue to commit to major
long-term Russian infrastructure projects in the years to come.
New laws, better protection for local and international
investors, and a slew of new projects stretching the length and
breadth of the country: no wonder Pankratov describes the PPP
market as being "alive" and bursting with health.

"There are new projects being rolled out all the time," he
says. "And with interest rates normalising, we are starting to
see more new projects entering the initial bidding stages."

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